Valuing Human Capital Based on Productivity

Rachel Mazzini HB-

Should people be paid for their human capital based on what they produce rather than being paid a fixed amount regardless of performance?

Since workers use their human capital to produce goods or perform services, some people believe that all workers in similar jobs should be paid the same amount for their work.  However, others believe that the price paid to a worker for his work should be based on his skills, productivity and value to the company.

Although some argue that each person should be paid for his human capital the same as others doing the same job, there are factors that should be considered such as skills required in performing a job and how productive a person is in using his human capital when deciding a salary.  If a firm pays all its workers the same wage or guarantees a fixed wage despite the number of goods produced, this idea can lead to a reduction of productivity. In his book Naked Economics, Charles Wheelan illustrates this idea when he mentions a Ronald Reagan joke about the USSR.  In the joke, a Russian lady wants to buy a car, so the Russian car dealer tells her that it will arrive in two years because of the long wait list. She asks the dealer if she should come back in the morning or afternoon two years from that date because she has a plumber is coming that day. Charles Wheelan mentions this joke to emphasize the lack of incentives an economy has when all of the people are paid the same.[1] Communist workers, being paid the same, became much less motivated to work, falling behind on the job. Workers will not perform at their full potential if they have a set wage no matter how much they produce in relation to the human capital needed.

The model of communism is in sharp contrast to paying people based on productivity. Emphasizing the idea of paying based on productivity, Wheelan states, “More and more industries are linking pay to performance, which increases wage gaps between those who are more or less productive.”[2] While an increasing wage gap sounds ineffective, paying based on productivity should incentivize employees to produce more in the same amount of time which leads to competition and more productivity.

By providing incentives to workers, some companies believe that employees will be more loyal and work harder which will result in greater productivity. On the topic of incentives, Wheelan mentions, “Good policy uses incentives to channel behavior toward some desired outcome.”[3]  While numerous companies are straying from the idea of using incentives, one real life example is Costco. The company “pay[s] living wages, provid[es] decent health care, and treat[s] employees with dignity and respect by rewarding for participat[ion] in self-management.”[4] Costco’s model illustrates the idea that treating its employees with respect and rewarding them for good behavior, will result in employees working harder and increasing their productivity.

Overall, companies should pay all of their employees based on their productivity relative to the amount of human capital required. While a fixed wage can decrease a worker’s productivity, creating a perverse incentive, positive incentives rewarding hard work and productivity, can benefit both the workers, who get more benefits and the firms, who get more work done.

Illustration: Adams, Scott. Human Capital. Illustration. Dilbert. August 5, 2002. Accessed June 22, 2016. http://dilbert.com/strip/2002-08-05.

[1] Wheelan, Naked Economics: Undressing the Dismal Science. Rev. Ed. (New York: W.W. Norton & Company, 2010,) 80-81

[2] Wheelan, Naked Economics, 143

[3] Wheelan, Naked Economics, 39

[4] James O’Toole, “The Ethics of Human Capital.” Markkula Center for Applied Ethics. Last modified January 1, 2005. Accessed June 22, 2016. https://www.scu.edu/ethics/focus-areas/business-ethics/resources/the-ethics-of-human-capital/.

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